Franchises for Sale

At the Top of the Fast-Food Chain

Chipotle Mexican Grill may not be a familiar brand to South Africans, but from humble beginnings it has completely revolutionised the fast-food industry in the US. Here are lessons the maverick chain has learnt in its short life.

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McDonald’s was a major investor in Chipotle up until 2006, putting in a total of $360 million. They fully divested in 2006 when Chipotle went public in the NYSC and came out with $1,5 billion.

Chipot-who?

Chipotle (pronounced chipot-lay) Mexican Grill was founded by American Steve Ells in 1993. It specialises in burritos and tacos, but what really sets it apart from everyone else is its mission statement of ‘Food with Integrity’, which focuses on organic ingredients and naturally raised meat.

The idea was received with such enthusiasm that in 1998, at 16 units, McDonald’s came knocking and grew it to 500 units. It now numbers over 1 600 locations in the US, Canada, UK, Germany and France, turns over in excess of $330 million annually, and employs more than 45 000 employees (and ditched McDonald’s along the way). This is how founder Steve Ells did it.

“In 1991 I was working as a classically trained chef. I couldn’t afford to eat where I worked, so I’d visit a taqueria called Zona Rosa. It always had queues of people and I remember jotting down how many people were in line and how long it took. From there I worked out it was a great economic model. But what struck me most was that quality and flavour were being produced inexpensively without being compromised like fast-food is.”

The lesson: It’s pretty rare for a franchise to emerge in a vacuum, meaning there will undoubtedly be independent businesses operating successfully before a franchise comes along. Steve Ells carefully researched his favourite Mexican spot to determine whether it would be a viable venture. He then had to figure out what made the spot so special and whether it was able to be replicated.

When researching a franchise to invest in, first research the industry and slowly narrow down. If there’s only one operating brand you need to find out why. But if your designs are to become a franchisor, ensure that what you’re looking to replicate is truly replicable without losing the all-important X-factor or quality that makes the independent store successful.

The lesson: Whether you’re a franchisee or a franchisor, the most important element of your success is knowing who your customer is. Naysayers in Chipotle’s early days said its food was too expensive and menu too limited to be successful. Neither turned out to be true and what resulted was a whole new category called fast casual dining where customers sought quality food in an inviting environment.

Today, even with 45 000 employees, the crew will come in the morning and see all the food prep they have to do. The result was that in 2011 annual revenue reached $2,2 billion, same-store sales increased by 11,2% and operating margins per unit hit 25,9%.

“I was unhappy with the taste of our shredded pork burrito, so I went out and sourced a higher grade of pork and raised the price by a dollar. We’re now the largest buyer of humanely raised and naturally fed pork, chicken and beef in the world.”

The lesson: This may sound counter-intuitive, but the move resulted in sales doubling to a full 8% of company revenue. When growing a franchise, maintaining quality is paramount to a brand’s success. Rather than looking to save money by finding a different supplier or using a cheaper product, always ask how the brand is able to deliver better quality to its customers, especially if you’re a new franchisor looking to establish yourself in the industry you operate in. Chipotle learnt an important lesson that customers notice the difference in flavour and are willing to pay for it.

“Much of Chipotle’s early growth was financed by a large investment from McDonald’s Corporation, we refused executives’ pressure to get us offering low-risk-high-profit items like cookies and coffee. We wouldn’t do cookies and coffee better than anyone else. And I don’t want anything to be part of Chipotle that wouldn’t be the very best.”

The lesson: When researching a brand, look to its integrity and how well it adheres to its vision. Adding cash-generating items may improve the bottom line, but can result in a brand losing focus.

“We spurn fast-food orthodoxy. Workers make everything by hand in front of the customer which leads to long lines that take more than four minutes. Turns out that’s not a problem because it’s more psychologically calming seeing food made in front of you than depending on pre-made foods to speed up lines. So to keep things quick, we continue to improve the efficiency of the service line.”

The lesson: Another trick Chipotle deployed to help cope with customer demand was to open stores in close proximity to one another. In 2008, of the 140 stores opened more than 90% were near other stores to soak up overflow. The lesson here is that provided the numbers are correctly balanced, rather than change the model of the business, simply open more stores to alleviate pressure and keep standards high.

“We had a real moment of truth when we partnered with McDonald’s in 1998. We were a gourmet burrito joint partnering with the world’s largest restaurant operator working together for aggressive growth. We had to face challenges head on to stay true to our original vision that fast-food and good food didn’t have to be mutually exclusive. We had to structure an agreement where McDonald’s became a ‘banker’ without changing recipes, ingredients or culture.”

The lesson: The skills and resources required to take a franchise from five to 50, from 50 to 500 and beyond in a short space of time are vastly different. Chipotle grew from 20 units to 300 in just five years. The brand had made a smart move by partnering with a giant that had well established infrastructure, but in order to maintain its uniqueness and quality offering it needed carefully negotiated terms and conditions.

If you’re a franchisor looking to sell to a larger holding company, be sure that what makes your brand unique doesn’t get toyed with.

“I believe in food as theatre. It should be an experience. At Chipotle, meals are made right there and you can say ‘Can I have some of that salsa?’ and the person serving will say ‘Yeah, I made it myself.’ There’s an interaction and it lends itself to us respecting and appreciating our customers.”

The lesson: No matter how big the franchise empire grows, or whether you’re a first time franchisee, customer service is king. Invest in regular training of your staff to ensure they’re greeting and serving customers in a way that makes them feel valued and want to return time and time again. It’s the small things that customers will take the biggest note of.

About the Author

Tracy-Lee Nicol is the managing editor of Franchise Zone Magazine and deputy editor of Entrepreneur Magazine. She studied her Masters degree in Art History and Visual Culture at Rhodes University and spent the next two years working and travelling in Asia. Her love of people, business and teaching is reflected in telling the stories of entrepreneurs, franchisees and franchisors, inspiring others to take the leap to being their own boss and bringing about positive change in South Africa.

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